Submitted by Paul Brodsky via Macro-Allocation.com,
The USS Perpetual Growth was picking up speed, steaming over calm seas despite a growing chorus of capital market Cassandras fearing trouble under the surface and further out at sea.
“Full speed ahead” Skipper Yellen barked to her economates, unperturbed by ominous radar images or the uselessness of econometric expertise at the zero bound, unmindful of passenger dysentery because 95.1% of the ship’s births were full.
“Look at all this liquidity!” she likely informed Captain Blithely, her commander in chief on shore, who had spent his presidency too disengaged of economic matters (or too politically astute) to have a cogent public thought on the matter, or perhaps smart enough to figure out everyone in Washington answers to the banks and that fixing their collateral damage social programs would be the best he could hope to do.
Indeed, the Fed Chair had gone rogue among her peers, charting her central bank’s shipping lane on a divergent path from her counterparts, Draghi and Kuroda, who were steering their monetary fleets to port. Captain Yellen seemed oblivious to the economic (and rhetorical) dangers of relying on consumption: an economy should not be beholden to eating its own productive cells.
We have argued there could be only one reason the Fed would want to hike rates: it is now responsible for US dollar policy and it wants a strong one to weaken other currencies, to prop up exporting economies, and to attract global capital and deposits to the US. Alas, the wind just died – not just for the US, but for all ships at sea.
Leading up to her March 29 press conference, numerous Fed speakers had tried to jawbone the market into believing the Fed remained on track to hike rates more, maybe even in April. And yet the markets had entirely dismissed such a possibility, in fact betting the Fed would be lucky to hike rates again in 2016. One point four percent US GDP put a quick end to that. She’ll get her year over year inflation, but not growth.
And so the de facto captain of the US economic ship of state walked the Fed’s position back to better reflect market doubts. “Economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting” she offered. Well, okay, if you insist. Tell the market something it doesn’t know.
The Fed Funds rate is functionally pointless now that Interest on Excess Reserves are higher and deposit rates are zero. The bottom line is that the Fed must keep asset prices up because assets are collateral for potentially deflationary systemic debt.
Yes, the Fed can do this with a strong dollar, but it can also use talk therapy rhetorical warfare its communication policy. The great global monetary parlor game is navigating the rocky shoals of greater economic discontent.
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